Corporate Governance and the Loss Reserving Process

Since the implementation at year-end 2004 of requirements under the Sarbanes-Oxley Act of 2002, many publicly traded property/casualty insurance companies have benefited from improved corporate governance surrounding the loss reserving process. However, the degree of improvement and resultant benefit has varied widely by company. While some have embraced the value of having stronger controls, others have viewed these requirements as resulting in significant additional process with only minimal benefit. The authors believe there are significant benefits to having strong corporate governance surrounding the loss reserving process. This paper defines key principles surrounding a well-controlled loss reserving process, and provides an evaluation framework to identify and prioritize opportunities for improvement. The areas addressed in this paper go beyond reserving approaches and data quality to consider the role of management, oversight by the board of directors and audit committee, documentation surrounding the reserve setting process, and financial statement disclosures.

Keywords: Governance, loss reserves, data quality, Sarbanes-Oxley, SOX, Model Audit Rule, Section 404, ASOP 41, ASOP 43, audit committee, controls, gold standard, framework.